Highlighting relevant Australian cases, Arris Investments Pty Ltd v Fahd & Anor [2010] NSWSC 309 and Palmer Petroleum Pty Ltd v BGP Geoexplorer Pte Ltd [2016] QSC 33, this Chapter considers current Australian law on whether a winding up should be stayed when the debt is disputed and subject to an arbitration agreement. Read about the position in Hong Kong, Singapore and in the United Kingdom – using the links above – for a wider comparative understanding of the legal landscape on this topic.
Arris Investments: The Court should refer the dispute to arbitration unless untenable or unconscionable
Arris Investments Pty Ltd v Fahd & Anor[1] (Arris Investments) is a rare Australian case in which a statutory demand has been set aside on the basis that the dispute was subject to an arbitration agreement. Here the NSW Supreme Court was considering a statutory demand for an amount allegedly due under a development agreement. The Court held that the dispute as to the calculation of distributable profits under the development agreement was not transparently untenable and was squarely within the scope of the arbitration agreement, and that therefore the Court should exercise its discretion to set aside the statutory demand.
Palmer J made a number of observations about the approach that should be taken:
(a) The Court retains its discretion under s. 459J(1)(b) of the Corporations Act as to what significance to attach to a mediation or arbitration clause in an agreement between the parties, and as such the existence of a mediation or arbitration clause will not automatically preclude one of them from serving a statutory demand on the other for a debt said to arise under the agreement.
(b) The Court should give no discretionary weight to the clause, if the party is taking a position so transparently untenable that the party would be invoking the arbitration clause in bad faith.
(c) Similarly, the Court should give no discretionary weight to the clause if the party seeking to set aside the statutory demand had continually frustrated the endeavours of the other party to have the dispute resolved in accordance with the arbitration clause, such that it would be unconscionable for that party to invoke the arbitration clause.
(d) But otherwise, an arbitration clause should carry great discretionary weight in considering whether a statutory demand should be set aside. 'If the dispute is fairly and squarely within the purview of a compulsory arbitration clause, the Court should not lightly permit one party to ignore the clause and precipitate legal proceedings by the issue of a Statutory Demand. In short, the Court should not encourage parties to breach their contracts.'
Palmer Petroleum: No dispute between the parties
In Palmer Petroleum Pty Ltd v BGP Geoexplorer Pte Ltd[2] (Palmer Petroleum), Palmer Petroleum applied to set aside a statutory demand for the payment of invoices issued by BGP Geoexplorer for the survey of petroleum resources in Papua New Guinea. The agreement between the parties was subject to an arbitration agreement.
BGP Geoexplorer had issued a number of invoices over 2011 and 2012. Palmer Petroleum made part payment of the invoices and entered into a number of payment plans with BGP Geoexplorer, under which it also paid some instalments. Only in 2013 did Palmer Petroleum dispute the quality of the work covered by the invoices. After BGP Geoexplorer issued a statutory demand in 2015, Palmer Petroleum applied for it to be set aside as the debt was disputed and subject to an arbitration agreement.
The Court agreed with the observation in Arris Investments that s. 459J(1)(b) of the Corporations Act gives the Court 'discretion to prevent abuses of process and to ensure the statutory demand process is not itself improperly used by parties to an agreement to escape an arbitration clause'.
Here the Court held that objectively there was no genuine dispute – it was a mere spurious claim, bluster or assertion. As such, the Court held that the arbitration clause was not properly engaged as there was no dispute between the parties that should properly be the subject of arbitration in accordance with the clause. Accordingly, Palmer Petroleum’s application to set aside the statutory demand was dismissed.
Where does Australian law now stand?
As illustrated above, there has been minimal consideration of whether a winding up should be stayed in Australia when the debt is disputed and subject to an arbitration agreement. The two decisions that squarely considered this issue, Arris Investments and Palmer Petroleum, held that the presence of an arbitration clause is significant in the exercise of discretion under s. 459(1)(b) of the Corporations Act 2001 (Cth), which allows the Court to set aside a statutory demand if it is satisfied that there is 'some other reason' to do so which is independent of the question of whether a genuine dispute or offsetting claim exists. The cases in Australia have not considered Salford Estates and subsequent cases in other common law jurisdictions.
There have been a number of cases concerning applications by shareholders for winding up of joint venture companies on the basis of oppression and other discretionary grounds which have considered this issue. In the most recent case of WDR Delaware Corporation v Hydrox Holdings Pty Ltd[3], the Federal Court declined to wind up the joint venture company and stayed the winding up order on the basis that the real dispute was an inter partes dispute under the joint venture agreement (which included an arbitration clause). The Court held that the questions of fact and law, which marked out the substantive controversy between the parties, were all matters which were capable of resolution by arbitration.
[2010] NSWSC 309
[2016] QSC 33
(2016) 245 FCR 452
